Monday, February 23, 2009

What Do Recent Nobel Prize-winning Macroeconomists Say about the Prospects of the Stimulus?

Talking to these giants of macro has convinced me that we need to be talking about is how to get the institutions right and keep them stable. What the government is now doing amounts to a pretty radical restructuring of our scheme of economic institutions, but with shockingly little deliberation about or regard for the optimality or stability of the overall incentive structure. This mess was precipitated by what turned out to be a disastrously unstable alignment of incentives. That fact would seem to prescribe taking a lot of care in thinking through how various large interventions might ramify through the system before jumping in. But our government’s behavior increasingly looks a bit like a zealous small-town narcotics squad, excited by its slick new SWAT gear, that’s just kicked down the door to a meth house and has started shooting at anything that moves.

2 comments:

Ideally, we would have all the time in the world to think through this. But if that were the case, we wouldn't have the crisis to begin with.

When someone's wheeled into the ER gasping for breath about to die, the medical personnel need to get acting, and don't have the luxury of meeting for several hours to talk things out.

The problem is timing; there is a cost to not thinking things through moreso, but there is also a cost to waiting to act.

With something this complex, one could arguably take years to hash things out, but by then we'd have economic collapse. This was also arguably true last year, when the first actions were taken to stem the crisis...even though these were very imperfectly administered, they probably did prevent a collapse of the financial system.

As for Nobel Laureates, the most recent one, Paul Krugman, has written extensively how he supports the idea of a stimulus, but wishes it were much larger. Ditto Nobel Laureate Joseph Stiglitz.

I would only add that the analogy of the small town narc squad taking down the meth house is an unfortunate one, since it would seem to imply that the problem is rather trivial in nature.

If a narc squad chooses to ignore the meth house in a small town for now, the vast majority of people will be unaffected. But the economic crisis is affecting just about everyone.

A better analogy, though admittedly too far in the other direction, might be the D-Day invasion...where we threw all resources at a huge problem, incurred major loss, did some planning but ultimately had to act... but at the end of the day accomplished a vital mission. Now this achievement didn't end the war, and only set us up for more battles and more losses...but it was necessary.

We are in a battle against major economic problems...and thus dramatic measures are, in the opinion of many, totally merited.